Phil Cannella Dispels the Myth of ‘Safety’ in Bonds

Phil Cannella knows that one of the ugliest words in the English language is ‘bankruptcy.’ Bankruptcy has ruined the savings, the nest eggs, and the lives of millions of Americans.

That’s why Phil Cannella finds it so appalling that declaring bankruptcy has become an accepted practice—almost a strategy—among major U.S. corporations.

“You realize,” Phil Cannella tells the gatherings he speaks to each week around the tri-state area, “that when a corporation goes into bankruptcy… that’s their payday, because they get to keep your money.”

And the people who are hurt by this the most aren’t the CEos or other officers of these major corporations. It’s the preferred stockholders, the bondholders, who never see any return on their investment. People who invested in General Motors learned this lesson the hard way after the financial downturn.

After the Crash of 2008, Phil Cannella wanted to know why General Motors was able to declare bankruptcy, thus fleecing bondholders out of billions of their hard-earned dollars. It wasn’t General Motors who felt the sting of that declaration—weeks later, they received bailouts to the tune of $40 billion dollars.

“One year later, we the people bailed out General Motors with our tax dollars,” explained Phil Cannella. “And just two years after declaring bankruptcy—are you aware that General Motors profited $11 billion—but paid back none of their bondholders or preferred stockholders?”

The numbers back him up. In the end, the GM bailout cost the American taxpayer $12 billion. But you won’t hear that from your broker.

“Who are bonds safe for? The company who issues them,” says Phil Cannella.

Bonds certainly weren’t safe for the people who lost money in the GM bankruptcy. They haven’t been safe for the thousands of municipal bondholders who’ve watched as various American cities go into bankruptcy, leaving them holding worthless pieces of paper.

That’s why Phil Cannella works hard to dispel the myths of ‘diversification’ in the form of a mixture of stocks and bonds. As he explains, stocks and bonds both fall under the risk category of investments. Bonds won’t protect you from a market downturn, nor will they provide you with a tax-free source of income.

Remember, bonds are graded based on the credit of their issuers. So if you see a bond with a high yield, that’s often accompanied by a high risk of default.